From the desk of Steve Strazza @Sstrazza and Louis Sykes @haumicharts
At the beginning of each week, we publish performance tables for a variety of different asset classes and categories along with commentary on each.
Looking at the past helps put the future into context. In this post, we review the absolute and relative trends at play and preview some of the things we’re watching in order to profit in the weeks and months ahead.
After several months of consolidation, the major indexes have set the foundation for another leg upward in line with their primary trends. We've been seeing many of them resolve higher in recent weeks.
We continue to see rotation into economically sensitive and cyclical assets - supporting our view that there is a strong appetite, not aversion, for risk.
And the FICC markets continue to confirm this bullish environment for stocks and risk assets.
I don't know about you, but I'm super excited for this coming year. I'm expecting volatility in both directions. And volatility = opportunity for options traders.
That said, let's not rush into anything. I know... if you're like me you're itching to start firing off trades.
But as the opening 90 minutes of trading has showed us so far today, things can get slippery fast as people and institutions start putting money to work and rotating money around in often sloppy fashion. This is pretty typical in the first couple trading days of any new year.
We retired our "Five Bull Market Barometers" in mid-July to make room for a new weekly post that's focused on the three most important charts for the week ahead.
This is that post, so let's jump into this week's edition.
Consumer Staples stocks are breaking out to new all-time highs. These are the stocks representing the companies whose services and products we as consumers would still buy regardless of how bad the economy might be. These stocks historically outperform by a lot when stocks in general are under pressure, which makes sense right?
I mean, no matter what, we're still going to brush our teeth and wash our dishes, drink beers and smoke cigarettes. Those are the "Consumer Staples": Procter & Gamble, Pepsi, Philip Morris, etc.
When stocks are doing well, you'll see Staples underperforming, because money is less willing to pay up for those defensive less growthy stocks. I wrote about this here and how this plays into our approach in the current market environment.
Anyway, here are Staples breaking out to new highs, and key extension level:
In a further effort to identify individual equities that fit within our larger more Macro thesis, we couldn't be happier to roll out and share our latest bottoms-up scan: "The Minor Leaguers."
We'll also be writing a post every other week where we outline some of our favorite setups from the watchlist. This is the first edition.
Moving forward, we'll be rotating this column with "Under The Hood" each week.
In order to make it onto our Minor League list, you must have a market cap between $1 and $2B. There are also price and liquidity filters.
Then, we simply sort the stocks by their percentage from new highs. Easy.
I'm incredibly fortunate to be able to have regular conversations with many of the top Traders, Analysts, PMs and Financial Advisors in the world.
So many of these friends of mine had their best year ever. Some of my friends absolutely crushed 2020, which is not surprising given their prior success and the increased level of opportunities sparked from spikes in volatility earlier in the year.
So what was the common denominator among the ones who succeeded the most? (because I asked them all)
They told me, each in their own ways, that they shut off the news and just listened to the market. You see, the "news" is designed to be a distraction. The better they are at distracting you from what's actually important, the more their precious sponsors will pay them. That's how that works.
The "news" people are not here to help you. In fact, in many cases, it's actually a malicious effort to distract. They know what they're doing. And they're really good at it.
I got well about 6-7 years ago, when I finally turned it off for good. And I've never looked back.
The end of a month is more like a celebration at ASC. We sit back, relax, and go through Monthly charts and look out for interesting trends developing across the globe. In our Top-Down Analysis approach, we go through thousands of charts to arrive at a wholesome view of the market.
There were five charts that popped out in particular. We thought of giving you a preview of our Monthly Charts Strategy Session which is scheduled for Tuesday, January 5th at 7PM IST.
Let's take a look at these charts!
What do you do when an index has clocked a 30 year high? You track it's every move and watch history as it unfolds in front of your eyes. Nikkei 225, which was on our watchlist, has finally moved above 26,900. A strong move would propel the price higher towards its next target of 32,850. This would in-turn have an impact on Japan's Asian peers. For now, let's wait and watch.
Here is a list of trade ideas organized by date, ticker symbol and directional bias. Please make sure you have clicked on the link and read the details surrounding the trade before acting upon any of them. Also, make sure you have checked with your financial advisor and tax accountants to make sure you are suitable to be executing what is discussed on this website. The risk management procedures and targets are detailed for each idea. Please read and review the terms and conditions page before making any trades of your own.
Me, JC, Steve, and the rest of the All Star Charts team were casually chatting during our weekly strategy session and Steve asked me: "What was our biggest options winner this year?"
Without a doubt, our best options trade in 2020 was long Peloton $PTON. We entered long October 60 calls in $PTON on June 17 when it was trading below $52 per share. The stock then went on a rocketship ride and touched an all time high north of $139 per share on expiration day Oct 16th, which we rode all the way. It rarely happens that we hold a long calls position all the way into expiration day, but the last 3 weeks saw barely a downtick, so there was never any reason to hit the escape hatch.
As we further discussed this, it hit me and I remarked to the guys that "What's your biggest winner?" is a bit of an unfair question. I don't think 2020 was a good year because of a handful of big winners. They certainly helped, but the real reason why 2020 was so successful was because PROCESS was our big winner.
Oh man this was a lot of fun! Fahmy calls me up and says let's invite everyone to a zoom call and talk about markets and drink Champagne.
Obviously, I said I was in!
We had two questions we were asking,
1) What was the biggest lesson you learned in 2020, and 2) What's your best trade for the first half of 2021?
Next July, whoever ended up picking the best trade gets a donation from us to the charity of their choice, plus I hand select a bottle of champagne and will be sending it over to the winner.
This was a great conversation with a group of really smart people. I'd be taking some notes on this one. There's good stuff in here.
Something we’ve been working on internally this year is using various bottoms-up tools and scans to complement our top-down approach. One way we’re doing this is by identifying stocks as they climb the market-cap ladder from small, to mid, to large, and ultimately to mega-cap status (over $200B).
Once they graduate from small-cap to mid-cap status (over $2B) they come on our radar. Likewise, when they surpass the roughly $30B mark, they roll off our list.
But the scan doesn’t just end there. We only want to look at the strongest growth industries in the market as that is typically where these potential 50-baggers come from.
